UPDATE 1-Itaú Unibanco puts high-risk insurance unit on the block

Reuters Staff

4 Min Read

SAO PAULO, Jan 22 (Reuters) - Itaú Unibanco Holding SA said on Wednesday it will put its high-risk corporate insurance unit up for sale in coming days, a move that should help Brazil’s most profitable lender deploy capital more efficiently in coming years.

In a securities filing late on Wednesday, the São Paulo-based bank said bidding for the unit will be “competitive,” without providing further details. Valor Econômico newspaper reported earlier in the day that Itaú had offered the unit to at least 10 global insurance giants.

The newspaper, which did not say how the information was obtained, said Itaú wants to sell the division because it will likely demand more capital allocations under new Basel III rules.

Itaú could fetch about 1 billion reais ($424 million) from the sale, according to Francisco Kops, an analyst at Banco Safra’s brokerage unit.

The unit, which specializes in offering insurance coverage for giant corporate projects in high-risk segments such as oil and gas and infrastructure, has revenue of about 1.7 billion reais ($723 million) annually and clients including state-oil company Petróleo Brasileiro SA.

Itaú denied that the unit had already been offered to any potential bidder. Allianz and Axa declined to comment on the Valor report.

Generali is not interested in the asset, a source familiar with the situation told Reuters, and the company declined to comment. Efforts to reach Zurich’s media office in Brazil were unsuccessful.

VALUATION

Preferred shares of Itaú, the bank’s most widely traded class of stock, gained 0.2 percent to 30.25 reais. The stock is down about 8 percent this year.

Itaú plans to keep the retail and personal insurance units, which have more stable revenues and higher returns than the high-risk insurance segment, Valor reported. While return on equity at the high-risk division hovers around 10 percent, return on equity at the retail and personal unit is around 30 percent, the newspaper said.

“At first glance, the move makes strategic sense because Itaú is not a relevant player in this segment, and returns on high-risk insurance are below the bank’s average,” Banco Safra’s Kops said in a client note.

The newspaper said Itaú, which did not give the price it is seeking for the unit in the prospectus, gave valuation guidance of 1.2 times the unit’s book value, the same metric used in recent mergers and acquisitions deals in the sector.

The sale comes after infrastructure projects related to hosting the World Cup in 2014 and the Olympic Games in 2016 got off to a late start, and the government auctioned rights to operate roads, railways and ports a year later than expected.

Government officials expected policy underwriting in the high-risk and reinsurance segments to grow three times as fast as overall economic growth through 2015. But with economic growth trailing the government’s 4.5 percent average target between 2011 and 2014, returns and policy underwriting have suffered.

Itaú also wants to shed the unit because contracts force it to assume policy risks for reinsurers it works with, Valor said. Reinsurers help primary insurers shoulder the risks assumed for clients in the riskiest, most expensive projects - like oil exploration, heavy construction and defense.